"To get rich is glorious." -- Deng Xiaoping. This is perhaps the smartest thing ever uttered by a member of the Communist Party.

Tuesday, April 08, 2014

Inequality update

The evidence continues to mount that the ongoing uproar over income inequality is much ado about nothing. Exhibit A is this recent piece from New York Times columnist Eduardo Porter (bolded parts mine):

As the income gap in the United States has exploded over the last three decades, blowing past the previous record set in the Roaring Twenties, scholars in fields from sociology and economics to psychology and epidemiology have tried to answer what turns out to be a difficult question: “So what?”

“The most common moral arguments for and against inequality rest on claims about its consequences,” Professor Jencks [described earlier in the column by Porter as "a renowned professor of social policy at Harvard"] wrote more than a decade ago. “If these claims cannot be supported with evidence, skeptics will find the moral arguments unconvincing. If the claims about consequences are actually wrong, the moral arguments are also wrong.”

For all the brain power thrown at the problem since then, however, specific evidence about inequality’s effects has been hard to find.

Porter then notes some of the various arguments that have been mounted by the inequality doom-mongerers, such as The Spirit Level's claim that income inequality leads to higher crime, greater teen pregnancy and even diminished life expectancy:

But does the data really back this up? One problem with these analyses is that they are based on correlations between levels of inequality and variables like life expectancy or the odds of poor children climbing the income ladder. But such correlations can’t prove inequality causes other social ills. They can’t disentangle inequality from the myriad things pushing American society this way and that.

Porter then offers up this:

Lane Kenworthy, a sociologist at the University of Arizona, is all too aware of these limitations. He was to be Mr. Jencks’s co-author on the book about inequality’s consequences. Now he is going it alone, hoping to publish “Should We Worry About Inequality?” next year.

“People that worry about inequality for normative reasons have been very quick to jump on plausible hypothesis and a little bit of evidence to make sweeping conclusions about its consequences,” Professor Kenworthy told me.

To avoid misleading correlations and better isolate inequality’s impact, Mr. Kenworthy studied its evolution over time, comparing how changes in income concentration across the world’s industrialized nations related to changes in a whole set of social and economic outcomes, from growth and employment to health and educational attainment.

He came up mostly empty-handed: “My tests suggest it seems to be a small player in the overall story.”

Professor Stiglitz notes that the United States grew faster during the decades of low inequality immediately after World War II than it did after inequality started rising in the 1980s. But Mr. Kenworthy finds no meaningful impact of inequality on growth one way or the other. “Income inequality isn’t the only thing that differed between these two periods,” he said.

Similarly, Mr. Kenworthy found no significant relationship between increasing inequality and life expectancy, infant mortality or college graduation rates, among others. Even when some patterns do mesh — teenage pregnancy rates fell a little more slowly in countries where the share of income going to the top 1 percent grew fastest — the relationship is weak. If you take the United States and Britain off the list, the relationship disappears.

Kenworthy expands his thoughts on income inequality in an interview with Porter posted on the Times' Economix blog:

The evidence supports a number of the most prominent [income inequality] hypotheses only weakly or not at all. As best I can tell from the available data, income inequality hasn’t reduced economic growth. It hasn’t hindered employment. It may or may not have played a role in fostering economic crises, including the Great Recession. It hasn’t reduced income growth for poor households. It may or may not have contributed to the weakening of household balance sheets by encouraging too much borrowing. It may or may not have reduced equality of opportunity.

It hasn’t slowed the growth of college completion. It either hasn’t reduced the increase in life expectancy or the decrease in infant mortality or, if it has, the impact has been small. It looks unlikely to have contributed to the rise in obesity. It hasn’t slowed the fall in teen births or homicides since the early 1990s. It may or may not have weakened trust. It doesn’t appear to have affected average happiness. In the United States it has had little or no impact on trust in political institutions, on voter turnout, or on party polarization. And while it may have boosted inequality of political influence, we lack solid evidence that it’s done so.

Keep in mind that, like Porter -- who should be classified as at least center-left based on a fair-minded reading of his columns -- Kenworthy is a man firmly rooted in the leftist camp (indeed, he has been praised by Matt Yglesias for his book calling for an expansion of the welfare state) who does not seem predisposed towards dismissing or downplaying possible negative impacts resulting from income inequality. And in fact he argues that income inequality is not cost-free:

On the other hand, income inequality has reduced middle-class household income growth. It very likely has increased disparities in education, health, and happiness in the United States. And it has reduced residential mixing in the U.S.

While Kenworthy presents it as established fact that inequality has reduced the income growth of the middle class, it is actually far from agreed upon. Indeed, in Porter's column he quotes Harvard's Professor Jencks that "'Most economists don’t feel there’s a logical mechanism that really is persuasive' linking the rise of the 1 percent and the stagnation of incomes for the rest."

As for the "very likely" idea that income inequality corresponds with disparities in education, health and happiness, this is fairly unremarkable. Given that money can purchase higher quality goods, including in education and health, it would be surprising if the two weren't related. But, as with income, the real issue is the absolute conditions of health and education, not their relative states (everyone having equally poor health or being equally ignorant would not be a victory). With regard to residential mixing, it seems logical that income inequality is in fact only a proximate cause, with the real culprit being found in restrictive zoning laws which depress housing supply and drive up its cost.

Kenworthy and Jencks aren't the only ones questioning the alleged desultory impacts of income inequality. Reviewing Thomas Piketty's new book on the topic, which has created a great deal of excitement among leftist intellectuals (Paul Krugman has called it "the most important economics book of the year — and maybe of the decade"), Ira Stoll highlights Piketty's quote that "inequality is not necessarily bad in itself: the key question is to decide whether it is justified, whether there are reasons for it."

Assuming the quote is not taken out of context, Piketty's apparent concession that inequality per se is not a bad thing seems a fairly stunning admission. After all, how often do we see hand-wringing about income inequality attached with any kind of qualifier? Rather it seems the issue is typically presented with very little nuance, leaving people with the impression that income inequality should always be considered a grave problem regardless of the particulars.

Piketty, of course, is in fact very concerned about income inequality -- that's the entire point of his book. Stoll explains why:

Piketty writes that "confiscatory tax rates on income" were "an impressive U.S. innovation of the interwar years" that deserve to be "reconceived and revived."

How does Piketty justify, morally, what he concedes to be confiscation?

To me the weakest part of his argument is his assertion that the money he is proposing to tax, now in private hands, was stolen in the first place.

He writes, "the courts cannot resolve every case of ill-gotten gains or unjustified wealth. A tax on capital would be a less blunt and more systematic instrument for dealing with the question." After all, he writes, "Broadly speaking, the central fact is that the return on capital often inextricably combines elements of true entrepreneurial labor (an absolutely indispensible [sic] force for economic development), pure luck (one happens at the right moment to buy a promising asset at a good price), and outright theft."

Here Piketty is speaking "broadly" indeed, tarring as "outright" thieves anyone who has managed to amass a million dollars or so worth of assets, and proposing to deal with the problem not by enforcing the criminal laws against theft, but by taxing everyone. He acknowledges his own ignorance here—"To be frank, I know virtually nothing about exactly how Carlos Slim or Bill Gates became rich." Surely the decent thing would have been to have looked into the matter and learned something about it before tarring the two men as thieves and proposing to tax away billions of their fortunes as punishment for their supposed crimes.

Again, assuming Stoll's characterization is accurate, Piketty's problem with inequality isn't due to demonstrable harm, but rather his belief in the unseemliness of it all. If the accumulations of vast sums of money is in large part the result of luck and thievery, the justification for its redistribution becomes much easier than if it is mostly due to personal enterprise and the provision of valuable goods or services.

I suspect that most of the left's anger over income inequality is similarly reasoned. Fighting income inequality isn't about curing an economic ill so much as correcting a cosmic injustice through the redistribution of ill-gotten gains (recall that suspicion of capitalism is a key part of the leftist creed -- otherwise they wouldn't constantly clamor for more government power to restrain it and taxation to ameliorate its perceived negative effects). Making that argument to the American people, however, does not seem to be a winning one at the current time, hence the continued futile quest for proof of income inequality's negative effects in order to justify their desired interventions.